CORPORATE LEGAL ENVIRONMENT

STUDY NOTES FOR BBA III SEMESTER, GRAPHIC ERA UNIVERSITY

ISSUED BY MR. GIRISH LAKHERA MA, MBA, PGDT

SALE OF GOODS ACT - 1930

Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of
Contract. Initially, this was part of Indian Contract Act itself in chapter VII (sections 76 to 123).
Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed
in 1930.

The Sale of Goods Act is complimentary to Contract Act. Basic provisions of Contract Act apply
to contract of Sale of Goods also. Basic requirements of contract i.e. offer and acceptance,
legally enforceable agreement, mutual consent, parties competent to contract; free consent,
lawful object, consideration etc. apply to contract of Sale of Goods also.

Contract of Sale - A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part-owner and another. [Section 4(1)]. A contract of sale may be absolute or
conditional. [Section 4(2)]. The term contract of sale is a generic term and as such includes
both a sale as well as an agreement to sell.

Thus, following are essentials of contract of sale

There must be at least two parties: - To form a contract, there must be at least two
parties i.e. a seller and a buyer. One person cannot act both as a seller and a buyer.
The subject matter of the contract must be goods: - Goods means every kind of movable
property other than actionable claims and money, and includes stock and shares,
growing crops, grass which are agreed to be removed before sale. Even standing trees
can be sold as goods. Actionable claims are claims which can be enforced only by an
action or suit e.g. debt. A debt is not movable property or goods.

Price: A price in money (not in kind) should be paid or promised. Money means currency
in circulation. However, goods may be sold for consideration which may partly be in the
form of money and partly of goods. But it cannot be in the form of kind alone as it will be
a barter or exchange and not sale.

Ascertainment of price - The price in a contract of sale may be fixed by the contract or may
be left to be fixed in manner thereby agreed or may be determined by the course of dealing
between the parties. [Section 9(1)]. Where the price is not determined in accordance with the
foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable
price is a question of fact dependent on the circumstances of each particular case. [Section
9(2)].

Transfer of property:- Property in goods means ownership. A transfer of property in

goods from seller to the buyer must take place. Property (ownership) is of two types
 (a) General Property:- It means ownership of goods which is transferred from seller to
the buyer

(b) Special property: It means interest in the property which is transferred by the pledgor
to the pledgee in case of Pledge.

It is aptly said that risk prima facie follows the ownership. Thus three things are transferred
along with the ownership. (i) Title (ii) Possession (iii) Risk (of loss/damage)

Besides the above a contract of sale must be absolute or conditional (Sec 4 (2)) and all other
essential elements of a valid contract must also be present in the contract of sale.

AGREEMENT TO SELL:- According to section 4 (3) of the sale of goods act 1930, where
under a contract of sale, the transfer of the property in the goods is to take place at a future date
or subject to some condition thereafter be fulfilled, the contract is called an agreement to sell

Whether a contract of sale of goods is an Sale or agreement to sell depends upon the fact i.e
ownership of the goods has passed from the seller to the buyer. If passed, it is sale otherwise
an agreement to sell.

Distinction between sale and agreement to sell

SALE AGREEMENT TO SELL

Property in goods is transferred immediately
Risk follows ownership. The property in
Goods passes along with risk
Property in goods is not transferred
Immediately
since property in goods does not pass
to the buyer, the risk also does not
Pass.

It is an executed contract (i.e. a contract for It is an executor contract (i.e. a contract

which consideration is to be paid in future) For Which consideration has been paid)

The seller can sue the buyer for the price of The aggrieved party can sue for damages
the goods (Since ownership is transferred) only and not for the price.

Sale and Hire purchase:- contract of sale resembles contracts of hire purchase very closely
and indeed the real object of a contract of hire purchase is the sale of the goods ultimately.
However the sale has to be distinguished from a hire purchase as their legal incidents are quite
different. In case of hire purchase contract the ownership of the goods passes to the hirer upon
payment of last installment. The position of the hirer is as that of a bailee till he pays the last
installment. If the hirer fails to pay the installment the seller may take back the goods.

How Contract of sale is made - A contract of sale is made by an offer to buy or sell goods for a
price and the acceptance of such offer. The contract may provide for the immediate delivery of
the goods or immediate payment of the price or both, or for the delivery or payment by
installments, or that the delivery or payment or both shall be postponed. [section 5(1)]. Subject
to the provisions of any law for the time being in force, a contract of sale may be made in writing
or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the
conduct of the parties. [section 5(2)]. Thus, credit sale is also a sale. - - A verbal contract or
contract by conduct of parties is valid. e.g. putting goods in basket in super market or taking
food in a hotel.

POSSESSION AND PROPERTY - Note that property and possession are not synonymous.
Transfer of possession does not mean transfer of property. e.g. - if goods are handed over to
transporter or godown keeper, possession is transferred but property remains with owner.
Similarly, if goods remain in possession of seller after sale transaction is over, the possession
is with seller, but property is with buyer.

Conditions and Warranties

Usually a seller makes certain representations and statements in praise of his goods while
selling goods to the buyer. There are certain stipulations (statements or representations) which
are essential for main purpose of the contract of sale of goods. These go to the root of contract
and non-fulfillment will mean loss of foundation of contract. These are termed as conditions.
Other stipulations, which are not essential, are termed as warranty. These are collateral to
contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved
party can claim damages. - - A breach of condition can be treated as breach of warranty, but
vice versa is not permissible.

A stipulation in a contract of sale with reference to goods which are the subject thereof may be a
condition or a warranty. [Section 12(1)]. A condition is a stipulation essential to the main purpose
of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
[section 12(2)]. A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which gives rise to a claim for damages but not to a right to reject the goods and treat
the contract as repudiated. [section 12(3)]. Whether a stipulation in a contract of sale is a
condition or a warranty depends in each case on the construction of the contract. A stipulation
may be a condition, though called a warranty in the contract. [section 12(4)].

Where a particular stipulation in contract is a condition or warranty depends on the interpretation

of terms of contract. Mere stating Conditions of Contract in agreement does not mean all
stipulations mentioned are conditions

Distinction between conditions and warranties

A condition is essential for the main purpose A warranty is only collateral to the main
Of the contract purpose of the contract
Breach of condition may be treated as breach Breach of warrany cannot be treated as Of
warranty breach of condition
The aggrieved party can reject the contract
Or claim the damages or both in case of A Breach of warranty gives a right to claim
damages and not a right to reject the
contract

When condition to be treated as warranty - Where a contract of sale is subject to any

condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the
breach of the condition as a breach of warranty and not as a ground for treating the contract as
repudiated. [section 13(1)]. Where a contract of sale is not severable and the buyer has
accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can
only be treated as a breach of warranty and not as a ground for rejecting the goods and treating
the contract as repudiated, unless there is a term of the contract, express or implied, to that
effect.

Implied conditions and warranties:- The express conditions and warranties are those, which
are agreed upon between the parties at the time of contract and are expressly provided in the
contract.

Implied conditions and warranties are those which are presumed by the law to be present in the
contract. Such implied conditions are as follows:-

Conditions as to tile :-If the sellers title turns out to be defective then the buyer must return the
goods and recover the price from the seller.

Conditions as to description:- Where there is contract of sale, to sell the goods by description.
There is an implied condition to sell the goods by description. It is best understood by the
principal that if you contract to sell peas, you cannot compel the buyer to take beans

Conditions as to sample :- Seller is not bound to sell the goods as per sample unless it is
agreed upon.

Conditions as to quality or fitness:- Usually there is no implied condition as to the quality or

fitness of the goods for a particular purpose. But where the purpose of the purchase is
specifically disclosed to the seller, the condition as to quality or fitness implies.

Condition as to merchantability:- The goods must be in saleable or marketable conditions.

Condition as to wholesomeness:- In the case of eatables and other provisions there is an added
implied condition that the goods shall be free from any defect and will fit for human
consumption.

Implied warranties:-

Warranty as to quite possession of the goods: - That the buyer shall have quite possession of
the goods.

Warranty as to non existence of encumbrances: - That the goods shall be free from any charge
of encumbrances in favour of any third party.

Doctrine of Caveat Emptor - The principle termed as caveat emptor means buyer be aware.
Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for
any defects in goods sold by him. This principle in basic form is embodied in section 16 that
subject to provisions of Sale of Goods Act and any other law, there is no implied condition or
warranty as to quality or fitness of goods for any particular purpose. As per section 2(12),
Quality of goods includes their state or condition. However the law has recognized certain
exceptions to protect the interest of the buyer.

(i) Fitness for buyers purpose:- Where the buyer makes known to the seller the
particular purpose for which the goods are required, It is the duty of the seller to
 supply such goods as are reasonably fit for the purpose. If the goods turn out to be
misfit for the purpose, the buyer may sue for the price.
(ii) Sale of goods by description: Where the goods are sold by the description, it is
impliedly applicable that the goods will correspond with the description, if it fails than
the buyer can sue for price.

(iii) Consent by Fraud: Where the seller has obtained the consent of the buyer by
making some misrepresentation or fraud.

Transfer of property as between seller and buyer - Transfer of general property is required in
a sale. Property means legal ownership. It is necessary to decide whether property in goods
has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk
accompanies property in goods i.e. when property in goods passes, risk also passes. If property
in goods has already passed on to buyer, seller cannot stop delivery of goods even if in the
meanwhile buyer has become insolvent. Where there is a contract for the sale of unascertained
goods, no property in the goods is transferred to the buyer unless and until the goods are
ascertained. [Section 18]. Where parties do not fix any time for passing of ownership of goods,
the following rules shall apply

Goods must be ascertained: Section 18 : Goods must be ascertained before sale. In case of
Specific goods, if it is in deliverable state, the ownership passes from seller to the buyer
immediately. In case of ascertained goods the property passes at the time of making contract.
In case of unascertained goods the property passes after ascertaining the unascertained goods.
i.e. after making the contract.

Intention to pass the property - Where there is a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time as the parties to
the contract intend it to be transferred. [section 19(1)]. For the purpose of ascertaining the
intention of the parties regard shall be had to the terms of the contract, the conduct of the
parties and the circumstances of the case. [section 19(2)]. Unless a different intention appears,
the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as
to the time at which the property in the goods is to pass to the buyer. [section 19(3)].

Appropriation of goods:- The terms appropriation has not been defined anywhere in the act .
It means doing something with the intention of identifying or determining the goods in respect of
which the property is to pass.

When goods are unascertained or are not in deliverable state. The seller or the buyer has to
ascertain the goods and make it ready in deliverable state. The property in goods shall only
pass from seller to the buyer when goods ascertained for sale are in deliverable state.

Appropriation by seller :- (i) By separating the quantity sold from the lot or other goods and
informing the buyer. (ii) by putting the goods sold in suitable receptacles e.g tin, bags, sacks etc.
(iii) By delivery of goods to the carrier

Appropriation by Buyer:- Sometimes goods are appropriated by the buyer when the goods are
in his possession. This appropriation is done with the consent of the seller.

Transfer of Title by non owner:- Generally a seller sells the goods of which he is the
absolute owner. But sometimes a person may sell goods of which he is not the owner. In such
case the question arise as to what is the position of buyer, will he get the good title of the
goods?

Nemo dat quod non habet The maxis says that no one can give what he has not got. If the
seller is not the owner of goods the the buyer also will not become the owner i.e. the title of the
buyer shall be the same as that of the seller.

Sec 27 of the Act also provides that where goods are sold by a person who is not the owner
thereof and who does not sell them under the authority or with the consent of the owner, the
buyer acquires no better title to the goods that the seller had. This rule is framed to safeguard
the interests of the true owner. In addition to this to protect the interest of the buyers this rule is
not rigidly enforced. Hence there are some exceptions to it.

(a) Sale by mercantile agent:- When a mercantile agent, who is in possession of goods with
the consent of the owner, sells goods in the ordinary course of business to a buyer who
buys them in good faith, the buyer gets the good title even though the seller had no
authority to sell.
(b) Sale by Joint Owner:- A joint owner who is in possession of goods, with the consent of
other joint owners may sell the goods to any buyer and the buyer shall get the good title,
if he has purchased the goods in good faith.

(c) Sale by person in possession under voidable contract:- Sec 29 provides that when the
seller of goods has obtained possession of the goods under a voidable contract and he
sells those goods before the contract is rescinded, the buyer gets the good title of the
goods.

(d) Sale by seller in possession after sale:- Where a person having sold the goods
continues to be in possession of the goods or of the documents of title and sells them
over again , the buyer gets a better title provided he has acted in good faith and without
notice of the previous sale.

(e) Sale by Buyer in possession:- Where the buyer has bought or agreed to buy the goods
with the consent of the owner obtains the possession of the goods but the seller still has
some right on goods, if in this case buyer sells the goods then the second buyer gets a
good title in good faith.

(f) Sale by unpaid seller:- An unpaid seller who is in possession of goods may resell the
goods and such buyer gets the good title .

Exceptions under other acts:-

(i) Finder of lost goods may resell the goods under section 169 of ICA 1872
(ii) Under sec 176 The pledge of goods has the right to sell the goods

(iii) In case of insolvency of the person the official receiver or assignee has the right
to sell the goods/property

(iv) Liquidator, (under companies act 1956) at time of winding up of company.

Passing of property in case of foreign trade:- In case of export and import of goods certain
terms are used which denotes the passing of risk from seller to the buyer.
FOB stands for "Free On Board" or freight on Board, and is always used in conjunction with a
port of loading. Indicating "FOB port" means that the seller pays for transportation of the goods
to the port of shipment, plus loading costs. The buyer pays cost of marine freight transport,
insurance, unloading, and transportation from the arrival port to the final destination. The
passing of risks occurs when the goods pass the ship's rail at the port of shipment. The seller
fulfills its obligations to deliver the goods from his possession to the shipment or Air cargo

Free on board price or freight on board price means a price which includes goods plus the
services of loading those goods onto some vehicle or vessel at a named location either ship port
of Air port.

For example, if it is said that goods are FOB Calcutta port "FOB Calcutta" indicates that the
seller will pay for transportation of the goods to the port of Calcutta, and the cost of loading the
goods on to the cargo ship (this includes inland transportation, Customs clearance,
documentation charges, Port handling charges etc.). The buyer pays for all costs beyond that
point (including unloading). Responsibility for the goods is with the seller until the goods pass
the ship's rail. Once the cargo is off of the ship, the buyer assumes risk.

CIF (Cost Insurance and Freight)

CIF (or Cost, Insurance, and Freight) is another shipping term used in international circles.
Internationally, it is used to indicate a method of shipment by water. In this case, the sellers
responsibility is toward the costs and freight to take the goods to its point of destination. The
buyer is responsible for any loss or damage from the point that the goods are delivered off of
the ship at its destination point, and once the goods pass the ships rails. The buyer is then
responsible for any costs incurred once the goods reach their destination and are loaded on
dock. One final thing the buyer is responsible for is insurance.

Buyers and Sellers duties - The Act casts various duties and grants certain rights on both
buyer and seller.

Rights of unpaid seller against the goods - After goods are sold and property is transferred
to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has
no right to take forceful possession of goods from buyer, once property in goods is transferred to
him. However, the Act gives some rights to seller if his dues are not paid.

Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained
above. In addition, seller can exercise following rights in case of breach of contract. Buyer has
also rights in case of breach of contract.

Measure for compensation and damages The Sale of Goods Act does not specify how to
measure damages. However, since the Act is complimentary to Contract Act, measure of
compensation and damages will be as provided in sections 73 and 74 of Contract Act.

Unpaid seller

The seller of goods is deemed to be unpaid (Sec. 45-1) (i) When whole of the price have not
been paid to him. (ii) When the bill of exchange or negotiable instrument has been received as a
condition of payment and the condition on which it was received has not been fulfilled by the
reason on dishonor of the instrument or otherwise.

Features of the unpaid seller

I.He must sell goods on the cash basis and must be unpaid.
II. If he sells on credit basis, he is not an unpaid seller during the period of credit.
III. The term of credit has expired and the price has not been paid to him.
IV. He must be unpaid wholly or partially. If a part of price remains unpaid, he is unpaid.
V.When the price is paid in the form of negotiable instruments and it has been dishonored.
VI.If buyer offers payment and seller refuses to accept, the seller is not an unpaid
seller.Example:

I. Party A sells a car on cash basis to party B and the price has not been received yet.
II. A sells good to B on 5 months credit period and B turns insolvent after 2 months.
III. A sells TV set to B on the same day cheque basis, the cheque is dishonored due to
insufficient fund. A is an unpaid seller.

Rights of an unpaid seller

The unpaid seller has following rights.
1) Rights against the goods.

In case property in goods has passed from seller to buyer

i. Rights of lien
II. Right of stoppage of goods in transit
iii. Right of resale

In case property in goods has not yet passed from seller to the buyer
i). Withholding delivery of goods
ii) Stoppage in transit

2) Rights against buyer personally

i. Suit for price

ii. Suit for damages for non-acceptance
iii. Suit for special damages and interest
iv. Repudiation of contract.

Auction sale - Auction sale is special mode of sale. The sale is made in open after making
public announcement. Buyers assemble and make offers on the spot. Person offering to pay
highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and
higher bids are offered and sale is complete when auctioneer accepts a bid.- - - In the case of a
sale by auction

(1) Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a
separate contract of sale;

(2) The sale is complete when the auctioneer announces its completion by the fall of the
hammer or in other customary manner; and, until such announcement is made, any bidder may
retract his bid;
(3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is
expressly so reserved, but not otherwise, the seller or any one person on his behalf may,
subject to the provisions here in after contained, bid at the auction;

(4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not
be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the
auctioneer knowingly to take any bid from the seller or any such person; and any sale
contravening this rule may be treated as fraudulent by the buyer;

(5) The sale may be notified to be subject to a reserved or upset price;

(6) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer. [Section 64].